The past few months have produced something that many of us haven’t seen in a long time: significant inflation. In April 2022, Canada’s official inflation rate reached a new 31-year high. This is challenging for many people personally, but even more complicated when looking at your business.
You may be asking yourself if your business will survive the process. Many of us have never managed a business during inflationary times. What is the best approach to managing a business when costs are increasing at record rates? The first thing to remember is that plenty of businesses survived prior inflationary periods — and some even succeeded.
Succeeding During Inflationary Times
When costs are rapidly increasing and customers are pushing back on pricing that would compensate for your increased costs, you need to find a balance. How do you manage your business?
Here are five key actions that can help you manage your business during this timeframe.
Fix Your Rates
If you have debt in variable interest rate loans, see what can be done to move into a fixed rate position. Interest rates are rising and will go up even further if inflation continues at its current pace. Protect yourself from unexpected rate changes by locking-in what you can before rates rise any higher.
Reduce Waste
Look for ways to shave costs that don’t affect the quality of your product. During stable times, companies often get lax with waste. There may be ways to decrease your waste by monitoring and optimizing your processes.
We are working with several businesses on their profit improvement processes. Contact us to find out how we can assist with finding ways to reduce waste in your company.
Raise Your Prices
Raise prices as much as your consumers will let you and keep an eye on what your competition is doing. Even if you aren’t experiencing cost increases today, you will most likely experience them shortly. If you’re ahead of the curve, you can gain margin that can be banked for future cost increases.
In addition, if you are selling to other businesses, they may require notice before a price increase. Getting this notice out as quickly as possible will help ensure that you minimize the effects of increased costs on your business.
Focus on Profit Per Item
Start to look at dollar profit per item rather than margin percentage. Many people want to maintain a margin percentage but then see that their cost increase will be too much for their customer. This goes back to finding that balance between managing costs while keeping customers satisfied.
Here is an example of how this can work:
Say you are selling an item for $100. The item cost you $45, so you have a profit of $55 or 55% gross margin.
The cost of your product goes up by 10%. Your cost is now $49.50. If you are tied to a 55% gross margin you will need to increase your price to $110. This may be more than your customers are willing to pay.
However, if your target is to keep your gross margin dollars the same, you could increase your price to $104.50 and still make the same $55. This drops your margin to 53%, but keeps the margin whole and may actually increase your volume as your competitors increase their prices further. Or, if you increase to $106, you would be making more dollar profit than before, which might help cover other increases.
Keep Your Employees Happy
Remember that hiring a new employee costs much more than retaining existing employees. Look for what motivates your employees. Employee loyalty isn’t always driven by additional pay so it is wise to listen to their needs to determine what matters most to them. Considering various ways to drive longer retention can help reduce unnecessary costs.
Don’t Forget to Ask for Help
Global factors will continue to impact our ever-changing economy. Growing your resiliency, and continually looking for ways to improve your profitability can help you succeed at a time when others are struggling.
If you need help developing a strategy to manage inflation, please reach out to us. We understand how complex and nuanced businesses can be and we will work with you to create easy-to-follow strategies designed specifically to meet your needs.